In which of the following situations would an auditor ordinarily issue an unqualified audit opinion without an
a. The auditor wishes to emphasize that the entity had significant related party transactions.
b. The auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's
c. The entity issues financial statements that present financial position and results of operations, but omits
the statement of cash flows .
d. The auditor has substantial doubt about the entity's ability to continue as a going concern, but the
circumstances are fully disclosed in the financial statements.
no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. F.S. have no material misstatements an auditor concurs with change. change is disclosed in the notes to the F.S.
An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph
A. Is appropriate and would not negate the unmodified opinion.
B. Is considered an "except for" qualification of the opinion.
C. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
D. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either
A. A qualified opinion or a disclaimer of opinion.
B. A qualified opinion or an adverse opinion.
C. An unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph.
D. A qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph.
In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or an adverse opinion on a client's financial statements?
A. Departure from generally accepted accounting principles.
B. Inadequate disclosure of accounting policies.
C. Inability to obtain sufficient competent evidence.
D. Unreasonable justification for a change in accounting principle.
review page 637
Three important determinants of sample size
type 1 error
auditor says something is not working when it is
type 2 error
auditor says something is working when it is not
efficiency (error type)
effectiveness (error type)
the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated.
desired confidence level
an important factor to determining sample size
the probability that the true but unknown measure of the characteristic of interest is within specified limits
higher sample=higher confidence level
allowance for sampling risk
tolerable deviation rate-expected
Suppose an auditor used sample results to project a misstatement (i.e., a point estimate of error) of $50,000 in the population. The auditor calculates a 90% confidence interval of +/- $10,000. This means the auditor can be 90% confident that the interval of $40,000 to $60,000 contains the true value of the error in the population.
Four nonstastistical requirements
1. any application of nonstastical sampling result in a comparable sample size to statistical sampling
2. Selection methods used should be expected to result in a representative sample
3. Errors observed be projected
4. Auditor consider sampling risk
items are chosen without regard to their size, source, or other distinguishing characteristics.
auditors best effort to be random without using tools
randomly select one number and then every tenth after that
is used more frequently to determine whether an account is materially misstated.
Used for substantive tests.
used to estimate the dollar amount of misstatement for a class of transactions or an account balance. Used for substantive tests.
used to estimate the proportion of a population that possesses a specified characteristic, e.g. the presence of a control.
Used to test controls.
1.Items in the population are divided into two or more subpopulations.
2.Used to emphasize certain population items (e.g. large dollar amounts).
1. the auditor should project the sample results
to the population.
2. the auditor should add an amount for
Note: sampling risk can be judgmentally determined but to be mathematically determined a random sample must be selected.
3.the total amount should be *compared with
MIRAD COPS, which commonly use audit sampling?
Math Recalculation - Yes
Inquiry - No
Reperformance - Yes
Analytical Procedures - No
Documents, Inspection of - Yes
Confirmation - Yes
Observation - No
Physical Assets, Inspection of - Yes
Scanning - No
Employees who maintain the AR subsidiary ledger should not also approve
write-offs of customer accounts
what control is most likely to help ensure that all credit revenue transactions of an entity are recorded?
matching prenumbered shipping documents with entries in the Sales Journal.
what would deter the lapping of collections from customers?
segregation of duties between receiving cash and posting the accounts receivable ledger
cash receipts from sales on account have been misappropriated what act would conceal this defalcation and be least likely to be detect by an auditor
understanding the S.J.
thee transactions associated with revenue process
Sale of goods
receipt of cash
return of goods
a report of all customer orders for which processing has bot been completed
-out of stock
-prepared any time goods are shipped to a customer
-bill of lading
one copy to customer
one copy to billing
-used to bill the customer
-type of product or service
-terms of trade
original to customer
*usually signals the recognition of revenue
used to record the necessary information for each sales transaction
mailed to customer monthly
mailed with customer's bill and returned with the customer's payment
records credits for the return of goods
initiated in credit department with final approval for write-of from treasurer
MAJOR FUNCTIONS OF REVENUE
credit function should be separated from
(possible for sales to be made to customers who are not creditworthy)
shipping separated from
(possible for unauthorized shipments to be made and for the usual billing procedures to be circumvented. unrecorded sale transactions and theft of goods)
AR separated from
general lever function
(individual can conceal unauthorized shipments. unrecorded sale transactions and theft of goods
cash receipts separated from
(cash can be diverted and the shortage of cash in the AR covered)
if the results of the test of controls don't support the planned level of control risk then the auditor sets control risk at a
higher level than planned
substantive analytical procedures test
revenue related accounts
what kind of tests are the best?
what assertions do customer confirmations test?
what assertions do bank confirmations test?
Rights and Obligations
What assertions do lawyer confirmations test?
how do you test for sales recorded before shipment?
trace from SJ to shipping docs
confirmations are required by auditing standards unless
1-AR balance is immaterial
2-confirmations wouldn't be affective
3-IR and CR are low
3 timing differences where there is not adjustment necessary
payment to customer passed (paid 12/29 received 1/2)
verifying that recorded AP include all accounts owed to vendors
verify that all accounts payable are recorded in the correct period
determine whether accounts payable have been properly accumulated from the journal to the general ledger
determine whether recorded ap are valid
compare selected amounts from the AP listing with the voucher and supporting documetns
search for unrecorded liabilties
select a sample of receiving docs for a few days before and after year end
obtain a listing of the AP and agree total to general ledger control account
expenses that can be matched directly with specific transactions. recognized upon recognition of revenue
recognized during the period in which cash is spent or liabilities incurred for goods/ servicesthat are used up at that time
-no future benefit
requests godos or services for an authorized individual or department within the entity
description, quality, and quantity of goods
-who approved the acquisition
-authorization to buy goods
bill from vendor
basis for recording a vendor's invoice in the PJ
-contains all relevant documentation supporting a purchase transaction
voucher register/ PJ
used to record the vouchers for goods or services
a vendor # can be assigned to each voucher and the voucher register can be sorted by vendor to produce a sub ledger for AP
sent monthly by vendor
major functions of Purchasing process
purchasing separate from
requisitioning and receiving
(fictions or unauthorized purchases can be made)
invoice-processing separate from
(purchase transactions can be processed at the wrong price or terms, or cash disbursement can be processed for goods or services not received)
disbursement function separate from
unauthorized checks supported by fictious documentation can be issued
unauthorized transactions recorded
AP separate from
blank or zero confirmation
doesn't state balance owed